Disney-Indiagames Deal- A New Benchmark In The Indian Gaming Industry

It may appear puny sized compared to transactions across other industries, but with Disney-backed UTV Software acquiring further 30 per cent in the country's largest digital gaming firm Indiagames, it is one of the biggest deals in the business. Techcircle.in takes an in-depth look at the deal in terms of valuations, who are the sellers and what is next for its founder.

Although the firm did not hit the magical $100 million figure as rumoured, with a corporate valuation of around Rs 315 crore or about $64 million, it still counts as a new benchmark.

UTV Software Communications Ltd has acquired an additional 30.02 per cent stake in Indiagames Ltd. for $19.28 million (Rs 94.56 crore) from founder-promoters and employee shareholders. Post the transaction, UTV will hold 86.02 per cent stake in the target company.

Even though the firm has not stated it explicitly, it appears that founder, promoter and CEO Vishal Gondal has cashed out as have the other employees who held over five per cent as of March 31, 2011.

When contacted, Vishal Gondal, the founder and CEO of Indiagames, did not disclose anything on his immediate plans, now that he is no longer a promoter of the company he founded over a decade ago. But he has indicated that he will continue to head the firm and it is business as usual at the company, this time as an employee. He shared, "A very emotional, proud & happy moment for myself & team Indiagames big thanks to my teammates, family, friends, gamers, partners & investors. Looking forward to an exciting time with Disney/UTV."

Gondal will not be moving into becoming an investor full-time. He is currently a partner at a seed venture capital fund called Sweat and Blood Venture Group.

That leaves Cisco Systems and Adobe (through Macromedia) as the other shareholders who are yet to sign the deal with UTV or, as it now happens to be, Disney. They hold around 14 per cent stake in Indiagames which going by current valuation is worth Rs 44 crore or around $9 million.

These two investors had picked the stake for just around $4 million over six years ago, so they are looking at more than doubling the value of investment. Not a bad deal, given that the firm went through a period of slow revenue growth and losses in the interim.

Valuations

The deal values Indiagames at around 5.8 times its total income for the year ended March 31, 2011. The transaction also values it at 87x EBIDA and 158x net profit (of Rs 2.47 crore) recorded in the fiscal ended March 2011 by Indiagames. But in this case, multiples based on revenues or income is a more relevant parameter.

If we consider the valuation changes in Indiagames itself, it's been quite a journey. Chinese internet company Tom Online struck a deal to acquire over 76.3 per cent of Indiagames from Infinity Ventures and IL&FS Investment Managers in a deal worth $13.7 million almost seven years ago. At that time, the deal valued the firm at Rs 82 crore or 4.4x its total income for that financial year, according to data compiled by VCCedge, the financial research platform of VCCircle.

Tom Online was also to put in a further $4 million to acquire fresh shares of the company, but it didn't go ahead with the additional funding that would have pushed its stake to over 80 per cent. Instead it roped in Cisco and Macromedia as minority investors at the same pre-money valuation.
UTV acquired around 54.8 per cent in Indiagames in December 2007 or just $9 million, valuing the firm at around Rs 65 crore. This was 3x revenues for that financial year, VCCedge data shows. Incidentally, Indiagames reportedly recorded losses during 2006-08 and that could be the reason why UTV struck a deal at a discount.

Experts Speak

While gaming industry executives say the current valuation is fair, some investors who are tracking the sector say they are not convinced.

"It's the first big valuation in the gaming industry and represents the hard work of over a decade for Indiagames. The company has a well-established business model with different revenue streams from mobile and broadband," said Nikhil Soman, founder, Dialify, a Mumbai-based audio gaming start-up.

With Disney's backing, Indiagames will gain a foothold into the global gaming market. So far, the company has primarily earned revenues from India. Indiagames' total foreign exchange earnings was just around Rs 5.5 crore for 2010-11, just around a third of its forex expense.

"Now, the team will get global projects. This deal will take them global and get a larger market for their products," said Soman.

But has UTV (or Disney) overpaid? SAIF Partners' Mukul Singhal, said, "From an exit perspective, it is on the higher side of the spectrum. There are not many companies that have been acquired in India, which is still at a very early stage in the gaming sector. The action is yet to happen."

Globally, gaming is a hot sector for mergers and acquisitions (M&As), with $30 million-40 million being the sweet spot for deals, especially in China and Korea. There have been few deals in the past. China's Tencent Holding Ltd Inc announced in 2008 that it would acquire 50 per cent stake in MIH India Global Internet in five years. MIH India owns a slew of websites including online casual gaming site ibibo.com and e-commerce site Tradus.in. In a high profile move in April 2010, Zapak acquired CodeMasters Software Co Ltd, a British game developer that had reported annual revenues of over $150 million. However, in India, M&As are rare as firms are still in the process of gaining scale.

"Globally, people are paying for exits in companies that have a good distribution set up and are cross-selling to consumers. There are global metrics to valuation of companies such as number of subscribers and percentage of paying users, which is still not seen in India. We have different business models here, with mobile carriers pushing games on operator decks," says Singhal.
However, Nikhil Khattau, Director, Mayfield India Fund, says, "We are glad to see value being created by Indian gaming developers in this space."

Disney's Gaming Acquisitions

Although gaming is not the core business for Disney, one of the world's biggest media firms, it is an important extension of its entertainment business. It has been busy snapping assets in the gaming circuit globally.

In August 2010, Disney bought online and social games maker Playdom for up to $763.2 million. Playdom was valued at $345 million in its last round of financing, according to TechCrunch. In March 2011, it acquired Rocket Pack, the makers of Facebook game Warimals: Cats vs. Dogs, for an estimated value running between $10 million and $20 million.

Disney has been stepping up its efforts to turnaround the gaming division. Last quarter, the division generated an operating loss of $86 million, according to Reuters. The company recently inducted James Pitaro and John Pleasants, who have said they will bring the gaming division to profitability in 2013. Recently, a Disney puzzle game called 'Where's My Water?' out ranked Rovio's Angry Birds on Apple's AppStore.

With the acquisition of Indiagames, Disney is taking a long term view into consideration, said Khattau of Mayfield.

India Gaming Action

Other gaming companies in India include Games2win â€“ an online player, mobile gaming firm Nazara Technologies Pvt Ltd, GameKhel (previously Indiatimes Gaming), casual online games site Ibibo and Hungama Digital Entertainment Ltd, that also has an online, casual gaming site called TheGameBox.com. The valuation of Indiagames is significant given the fact that the gaming sector has been quiet and there have not been any major success stories so far.

But there has been a recent flux in the gaming ecosystem in India, with start-ups attracting investment from investors. Hyderabad-based Mojostreet, a location-based mobile gaming start-up, received a seed funding of $350,000 from Srini Koppolu, former managing director of Microsoft India Development Center, and J.A. Chowdary, former managing director of Nvidia India. Recently Bangalore-based Ojas Venture Partners, along with SOS Ventures of China, invested in the US-based Play140, a social gaming start-up.

Younger firms, according to Singhal, will fare better compared to older gaming set ups. "Because the content consumption paradigm is shifting at a fast pace, start-ups will define rules of gaming in this scenario. Younger companies are doing far better," he added.